PRACTISING EFFICIENCY 
AND KNOWING COSTS 



PRACTISING EFFICIENCY 
AND KNOWING COSTS 



A LETTER TO A NEW ENGLAND 
MANUFACTURER 



BY HARRINGTON EMERSON 

PRESIDENT OF THE EMERSON COMPANY 
EFFICIENCY ENGINEERS 



THE EMERSON COMPANY 

NEW YORK PITTSBURG CHICAGO 



Copyright, 1912, by 
The Emerson Company 

Additional copies of this pamphlet 
may be secured by addressing 
The Emerson Company at 
30 Church Street, New York 
584 1 Nicholson Street, Pittsburg 
McCormick Building, Chicago 



CI.A31779: 



DEAR SIR: — In compliance with your 
request of last week, I give you here- 
with the substance of my remarks on 
practising efficiency and knowing costs. 

In the operation of any undertaking one 
may attain high efficiencies and know little 
about costs, or one may know all about costs 
and practise no efficiencies. Which is more 
importani? 

When I was manager of a glass works I 
occasionally took Sunday-dinner with a French 
glass-blower. Such meals for flavor and savori- 
ness I have never eaten anyw^here before or 
since, not even in the best restaurants of Paris, 
London and New^ York. The w^ife who cooked 
and served the meals w^as a French peasant 
woman, unable either to read or write. Her 
husband gave her $20 a month to run the 
table. She could scarcely count, so she w^ould 
buy one thing at a time and pay for it, re- 
ceive the package and change and then buy 
another item. She also had a garden full of 
marvelous vegetables and herbs. My ! but 
she was efficient as to quality; she did not 
pay more than she ought in price nor did she 
buy table salt mixed with corn starch at $0. 1 
a pound when rock salt at $0.02 answered 
the purpose as well. My! but she was effi- 
cient as to quantity; she did not buy more than 
she needed nor did she ever use more than 

3 



PRACTISING EFFICIENCY 

enough. This peasant woman did not know 
anything about cost-keeping, but she was a 
born and trained manager, practising that 
French thrift which has made the French 
nation one of the richest in the w^orld. 

I also knew a young American who had 
"system" on the brain. He subdivided his 
expenses under a great number of heads. He 
did not have a very large income — had to 
earn or beg or borrow it. He would pay 
any price that sellers asked, and he bought 
fourteen-dollar shoes when three-dollar shoes 
would have answered. He had twice as 
many suits as he needed and he got very little 
use out of them. It w^as the same w^ith food, 
with lodging and with travel. On trains he 
paid extra fares, took the drawing-room but 
spent most of his time in the buffet car. My! 
but he w^as inefficient ; paying more than he 
should for everything, using higher qualities, 
buying more, using more than he should. 
Yet his accounts were beautifully drawn up 
in blue and red and green inks as well as 
black. 

Which quality is more important in run- 
ning a plant, efficiency or system ? — the efficiency 
of the Scotch, the Qyakers, the Yankees and 
the Swiss, or the system that balances up 
United States expenditures to a cent and 
spends in proportion to what it gets four 
times as much money as the Swiss Republic? 

4 



AND KNOWING COSTS 

No doubt there are efficient French man- 
agers who know how to read and w^rite and 
figure. No doubt there are systematic men 
who also practise efficiency, but the point I 
w^ish to make is that efficiency and system are 
totally different and that efficiency is by far the 
more important of the two. If I knew that every 
part of a plant I was managing was being 
operated at 1 00 per cent, efficiency, detailed 
costs would be relatively unimportant. To 
know^ every cost, yet not know w^hat the ef- 
ficiency is, whether high or only 50 percent, 
is as reckless as to run a steam boiler without 
safety valve or steam gauge, trusting that it 
w^ill not blow^ up. 

Efficiency is the relation betw^een what is 
and what ought to be. To determine what 
actual costs are is a clerical task, but this 
helps very little if we do not know what co^s 
ought to be. Also, even if we are told what 
costs ought to be, it requires all sorts of skill 
to attain the ideal. 

We may be running a foundry in which 
our castings cost $2.75 per hundred pounds. 
We may know that in another foundry similar 
castings cost $1.75 per hundred pounds. In 
such cases it is very usual for the superintend- 
ent to blame the equipment, to assert that if 
he had a new^ foundry w^ith new^ equipment 
he could undoubtedly surpass the rival. It is 
also quite usual for the owners to blame the 

5 



PRACTISING EFFICIENCY 



superintendent or the equipment and to advo- 
cate a change. Nobody knowing where or 
why the losses occur, everybody blames 
somebody or something else. If the w^here 
and the v/hy are know^n, a thousand -dollar 
investment might cut the cost to $1.75. If the 
facts and remedies are not know^n, the emo- 
tional expenditure of $100,000 might run the 
cost up to $3 per hundred pounds. There is, 
therefore, a great difference betw^een the 
relative importance of cost determinations 
(only a fraction of the efficiency principle of 
"Reliable, Immediate, Adequate and Perma- 
nent Records") and the skilled experience 
that can determine fair standards, and there 
is also a great difference betw^een the analyti- 
cal ability to determine fair standards and the 
executive ability and skill to attain them. 

To illustrate from horse- racing. The 
ancients five thousand years ago raced 
horses. Although it v/ould have been very 
easy to have raced over a measured course 
and to have timed the speed by an hour- 
glass, a water clock, or by the beats of a 
pendulum regulated to an hour-glass, it does 
not seem that even these elementary records, 
corresponding to cost accounting, were ap- 
plied until about one hundred years ago. 
After thirty years of records as to trotting 
horses, one or two men w^ho had given the 
subject life - long practical study set the 

6 



AND KNOWING COSTS 

extreme achievement of the trotting horse at 
two minutes. It took forty years more of 
intense refinement of track in shape and sur- 
face and banking, intense refinement of shoes 
and harness, intense refinement and improve- 
ment of sulky, intense and special skill on the 
part of driver as well as immense betterment 
in the physical welfare and training of the 
horse to realize two minutes out of the most 
carefully and selectedly bred horse. 

The follow^ing percentage estimates, based 
on experience in many industries, show^ the 
relative importance of cost records (requiring 
merely clerical fidelity and skill), efficiency 
standards (requiring the co-operation of en- 
gineers and scientists of many kinds) and of 
attainment of standards (requiring the highest 
executive skill): 

Cost Records ... 5 per cent. 
Efficiency Standards . 30 per cent. 

Attainment of Standards . 65 per cent. 

Total . 100 per cent. 

The diagram on page eight illustrates 
plainly the difference between cost deter- 
mination and efficiency achievement. It is an 
actual record of cost and efficiency work in a 
large plant. 

Cost records had been most voluminously 
maintained in exhaustive, expensive and use- 
less detail for several years prior to 1907. For, 

7 



PRACTISING EFFICIENCY 



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AND KNOWING COSTS 

one of the items of expense in this plant the 
diagram shows the cost per unit, which in the 
most bewildering manner fluctuated between 
the extremes of $86 in May, 1905, and $128 
in September, 1905. Each total was made up 
of several thousand items as to each of w^hich 
a subsidiary but similar monthly record was 
made up. 

Without any connection w^hatever w^ith 
the cost department, which was in fact 
intensely hostile, efficiency work was begun 
in January, 1907. Immediately and with a 
few men, preliminary standard costs w^ere 
established, these individual standard costs 
summing up to a total of $46 per unit. These 
preliminary standards were based on time 
and motion studies numerous and varied 
enough to establish the average current effi- 
ciency of the plant, for if a hundred well- 
selected tests show only 40 per cent, average 
efficiency, it is an impossibility that a thousand 
or ten thousand tests will vary much in either 
direction, either above or below the test 
average. 

Efficiency depends almost wholly on the 
application of certain broad general princi- 
ples. If these are lacking, it is as impossible 
to have high efficiency as to run an auto- 
mobile 60 miles an hour up a rocky mountain 
side where there is no road. The cause 
of the inefficiency in this plant, in spite of 

9 



PRACTISING EFFICIENCY 

elaborate cost records, was the failure to 
apply principles. 

The measurement of the loss was deter- 
mined by tests. Having on the strength of the 
tests and previous experience, boldly, but not 
rashly, established a standard of $46, less 
than one-half of the previous tw^elve months' 
average ($105) and 46 per cent, below^ the 
previous lowest record of $86, the next task 
was to bring up efficiency from 44 to 1 00 per 
cent., to bring down cost from $105 to $46 
per unit. In going about this task none of 
the elaborately -kept records were of the 
slightest use except to record progress. They 
had no more influence on the result than a 
thermometer has on the weather or a stop- 
watch on the speed of an aeroplane. If there 
had been no cost records, efficiency would 
have gone up and costs come down just the 
same. If the records had not been kept by 
a hostile department on exactly the same plan 
as during previous years, few would have 
known and still fewer have admitted that any 
progress had been made. As the record 
show^s, efficiencies increased and costs dimin- 
ished steadily after the first month. 

By September, 1 907, efficiency had risen to 
92 per cent, cost per unit had fallen from $ 1 05 
to $50. In October, 1907, the panic occurred, 
the plants were almost closed and both 
records and efficiency work were suspended. 

10 



AND KNOWING COSTS 

SUMMARY 

On account of the excessive expense and 
small returns cost accounting is viewed with 
disfavor by many executives. It adds con- 
siderably to overhead expense, which every 
manager and superintendent is ambitious to 
keep down. Also, so many records are often 
required from workers, from foremen, from 
superintendents that they do not have enough 
time for their own work. 

Efficiency work is not an overhead ex- 
pense. It is a productive department whose 
motto is "Wealth from Waste." An efficiency 
department is inexcusable unless it yields in 
gain even the first year several times w^hat it 
costs. If there is a big loss due to ineffi- 
ciency, it may cost anyw^here from $5 to $50 
to rescue $100. If the plant is a small one 
the percentage of cost to saving is naturally 
higher than if the plant is a large one, though 
an efficiency scheme in its elements is essen- 
tially the same for the little plant as for the 
big one. Even if in a little plant an expendi- 
ture of $50 yields only $50 net profit, it is 
after all a remarkably productive investment. 

The largest part of the value of the 
efficiency counselor is that he knows w^hat 
not to do. If a chicken is put in a cage or 
maze from which it can only escape by taking 
one course out of a hundred, it will take it 

11 



AUG 14 19^2 



PRACTISING EFFICIENCY 

half a day of anxiety, of fluttering, before 
it accidently strikes the right combination 
and gets out. If put back again it takes a 
shorter time to get out and finally by not 
taking the wrong paths it makes its wray out 
in a fe\sr minutes. Its improved efficiency is 
due to the omission of mistakes. 

Any one can open a tumbler lock if he 
knows the combination. If he does not know 
it, the chances against hitting it by accident 
are many and this alone constitutes the safety 
of the lock. 

So, too, in efficiency work, there are a 
score of things that must not be done for 
every one that must. It requires thorough 
knowledge of efficiency principles and long 
experience in their application to know what 
"not to do," and in knowing these pitfalls lies 
success in applying efficiency principles. 

Very truly yours, 

Harrington Emerson 



12 



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029 976 046 7 # 



